Think Wells Fargo is bad? Look at what banks do with debit, credit card fees

Even as Congress heaps scorn on Wells Fargo for allegedly creating fake bank accounts to meet sales targets, a House committee’s recent vote to roll back federal regulations for the banking industry drew no roars of outrage. And that’s even though the legislation approved by the committee included a provision that would cost a lot more people a lot more money than the misbehavior Wells Fargo was accused of.

Buried in the Financial CHOICE Act was language that would repeal a five-year-old Federal Reserve limit on price fixing that has cut debit card swipe fees in half.

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The Fed’s cap has saved consumers about $6 billion a year, but repeal means that those savings would be lost.

Credit and debit card swipe fees that banks charge merchants to process plastic transactions are a huge but obscure practice few people know about. Because the card companies don’t compete on their processing costs and the banks don’t compete on their swipe costs, these price-fixed fees amount to more than $50 billion a year. Retailers are forced by card company rules to pass them along to consumers in the form of higher prices across the board.

These fees cost consumers hundreds of dollars a year for the average family even if they don’t use a card, unfairly burden small retailers for whom the fees are their second-largest operating expense after labor, and hurt the entire economy because they siphon off money Main Street businesses could otherwise use to invest and expand.

If people knew how much these fees cost them in higher prices and hurt their local merchants, they would be outraged and Congress would hear about it.

Yet Visa and MasterCard’s dominance over this market and the clout of the largest banks keeps this unfair, uncompetitive practice in place.

Let’s say you buy $100 worth of school supplies with your credit card. The store is on the hook to the bank that issued your card for a swipe fee averaging about 2 percent – and sometimes as high as 4 percent. That can amount to as much as $4 even though it costs the bank only a few cents to process the transaction.

Because retailing is so competitive and transparent, merchants’ profits are notoriously small – most earn only a penny or two on a $1 sale. That means they can’t absorb a $4 fee on a $100 purchase and have to build the cost of these fees into prices or go out of business. Since they don’t know when they set prices whether a customer will pay cash or credit – and credit card companies have made cash discounts difficult – that means everybody pays more. And the impact is far more pervasive than the alleged Wells Fargo scam.

In addition, Visa and MasterCard have also tried to limit the number of companies that process debit transactions for merchants, trying to steer as many transactions as possible to systems controlled by the two card giants. That’s why part of the limit on debit card swipe fees was a requirement ensuring that retailers have the option of multiple processors every time a card is used. That, too, would be tossed out under the Financial CHOICE Act.

Debit card swipe fee reform works. Every impartial source that has studied reform – the Philadelphia Federal Reserve, the federal Government Accountability Office and others – has found that both consumers and merchants, even small banks and credit unions, have benefited.

Even with reform, banks still make a lavish markup on every debit card transaction. The Fed says the average debit transaction costs a bank about 4 cents to process. But the swipe fee cap allows them to charge about 24 cents on average. That’s a profit of about 500 percent – a profit margin any executive in any other business would love. And if Congress wipes out steps that have been taken toward competition by passing the CHOICE Act, the banks will charge even more for each of the billions of times per each that a card is used.

With profits like that, the swipe fee cap and related pro-competitive efforts shouldn’t be repealed. If anything, they should be expanded. And since it only applies to debit cards, credit cards need reform, too.

Whether they are on credit cards or debit cards, non-competitive swipe fees and processing costs mean consumers pay more on every single item they buy every day, from lunch to sending out the laundry to buying a lawnmower.

That adds up quickly to hundreds of dollars per household a year – all through price-fixing.

So, the next time you watch Congress beat up on Wells Fargo’s top executive or some other banker over a bad but limited banking practice, ask why lawmakers aren’t expressing just as much outrage over something that affects far more consumers. Where is the outrage over swipe fees? It’s time for consumers – and Congress – to get angry.

Mallory Duncan is senior vice president and general counsel of the National Retail Federation and chairman of the Merchants Payments Coalition.

The views expressed by authors are their own and not the views of The Hill.